Genneva Gold 101

There have been considerable articles published in the local media by persons claiming to be highly qualified, skilled and ostensibly knowledgeable with regards to the raid and seizure conducted by Bank Negara Malaysia (BNM) on Geneva Malaysia Sdn Bhd (GM).

With utmost respect to these self anointed pundits and publicity seekers may I say that they have not addressed the critical issues with an even iota of accuracy and worse still with a dramatic ignorance of the real facts.

In my considered opinion the real and relevant issues are:

How will GM deal with existing customers to whom gold has been sold?

How will GM deal with new customers to whom gold has been sold but gold has not yet been delivered?

Are GM’s operations sustainable in the long term?

Is this a deposit taking scheme – is it considered investment?

Preliminary:

There is one major misconception that customers do not hold the physical gold purchased. Every single customer is in possession of the amount of gold they purchased. The only exceptions to this are those have sold the gold back to GM and were awaiting their cheques and the purchases which were pending delivery at the time of the raid. There are also considerable constrains in providing detailed current data to adequately explain the first 2 questions because all available data, documents, cash and gold have been seized and are now in the custody of BNM. Subject to this caveat I will attempt to address the issues raised.

Existing Customers:

Upon release of company assets and funds, only GM will be able to calculate the exact amounts required to accept offers by GM’s existing customers to sell their gold upon contract maturity. However, it is a specific term of GM’s agreement with their customers that they are not obliged to accept their offer to sell. Depending on the financial situation of the company GM has the choice to decline such offers. In all likelihood, GM’s business model will permit them to accept the offer. Even in the event the offer is not accepted, customers will not be out of pocket as they have the physical gold, which has risen substantially in value. So the alarmists who cry foul by saying “you can say goodbye to your investments” are way off the mark.

In respect of the hibah, it must be emphasized that it is entirely discretionary. Again, depending on the profitability of the company it is always the policy of the company to share the profits with the customers. It is this policy, which has ensured customer satisfaction. GM has consistently fulfilled their written indication regarding the hibah rate offered.

It can safely be hypothesized that like any other trading business, it is always dependent on continuous trading, generation of cash flow and sales for a operation to grow and generate profits. Consequently it is safe to state GM given time to overcome the delay caused by the disruption in their operations (by the seizure of all their documents and their main server) they can fully meet their commitments. It is empirical fact that based on their experience thus far, GM has had no problems in fulfilling their commitments. There has not been single case of default by GM.

New Customers:

It must be pointed out that GM does not have the exact data as to how many purchases have been made from the date of the BNM raid until now. Furthermore GM also do not know the total amount of purchases made to whom gold has not been delivered. In order to identify the situation they need to examine their bank statements, all the executed contracts, purchase orders as well as and the quantity of gold now in the custody of BNM. Without this data they will not be able provide any specific numbers. Having said this, it appears reasonable to assume that the funds in the bank, coupled with the physical gold in GM’s possession (now held by BNM), and the cash seized by BNM would provide a strong financial base to fulfill their obligations, especially (and only) if GM is able to resume operations as soon as possible. Now that large contracts are due to mature it is imperative that BNM take a decision urgently if gross injustice and loss is to be averted. The ball is now squarely at BNM’s court and not at GM’s.

It must be emphasized that like all business operations, GM’s business is conducted on the basis of an efficient cash flow in relation to the turnover in the business. The key to their operations has always been and will continue to be their ability to repeatedly purchase gold in the market. GM has empirically proved this as a sustainable formula that works.

Is this an Investment or Deposit Taking Scheme:

An investment, by all definitions means putting money into something with the expectation of gain. The most vital fact is that the title to the money always remains in the owner of the money. The investing agent has only the power (either discretionary or non-discretionary) to invest the money as agreed with the owner. In the case of GM the owner of the money does not retain title because he is not “investing” in the true sense of the word because; in reality he is purchasing gold. Once he has paid for the gold and the title and physical gold has been delivered to the purchaser, the title to the money moves to GM. No stretch of the mind can possibly classify this simple and straight forward buy/sell transaction as an investment.

General Comments:

In explaining GM’s position with regards to the issues above, one cannot avoid comment on the often-announced perception by many critics of the company that GM’s business is a Ponzi scheme. To an objective and reasonably discerning mind it can be categorically stated that this is not a Ponzi scheme. The classic definition of a Ponzi scheme is

“A fraudulent investing scam promising high rates of return with little risk to investors. The Ponzi scheme generates returns for older investors by acquiring new investors. This scam actually yields the promised returns to earlier investors, as long as there are more new investors. These schemes usually collapse on themselves when the new investments stop.”

The other damaging perception is that GM’s operation is a Pyramid Scheme. The definition of a Pyramid Scheme is

“A Ponzi scheme is similar to a pyramid scheme in that both are based on using new investors’ funds to pay the earlier backers. One difference between the two schemes is that the Ponzi mastermind gathers all relevant funds from new investors and then distributes them. Pyramid schemes, on the other hand, allow each investor to directly benefit depending on how many new investors are recruited. In this case, the person on the top of the pyramid does not at any point have access to all the money in the system.”

In rebutting these two allegations, the following fundamental differences between GM’s operations and that of a Ponzi/Pyramid Scheme is plaintively obvious:

Differences:

GM does not procure new funds to service old customers. Cashflow is generated from the constant buying and selling of a commodity that has been proven to consistently appreciate in value in the medium and long term.

GM does not solicit funds. They sell gold.

Like any other retailer, they buy at wholesale and sell at retail. If there is a profit, the company shares the profit with the buyers (hibah)

GM does not offer a buy back guarantee. There is a written agreement between the buyers and GM to this effect.

If the need arises, GM can refuse to accept the customers’ offer to sell their gold to GM. If this should happen, the customer has the physical gold and would have received the hibah. Therefore it is unlikely that he would have suffered a loss.

As GM does not undertake any other investment business GM’s exposure is strictly limited only to the purchase and sale of gold.

It cannot be denied that like any other business, there is an element of risk because the vagaries of gold price, although reasonably predictable, cannot be guaranteed.

Customers have been advised to undertake their own due diligence and bear any risks arising from or connected with the purchase of gold from GM.

The sustainability of GM’s operations is not entirely dependent upon new buyers. It is the price being fixed at time of purchase by customers relative to the variation in the price of gold that determines this ability bearing in mind that GM already have a positive difference between wholesale and retail price.

In order to sustain and grow in any business, you will always need to expand and market your products, but this does not necessarily mean that GM uses new customers money to pay old customers. Indeed this is not their practice as they are continuously buying gold to supply new buyers.

This not pyramid scheme but a referral system very much like what Banks mortgage and credit card sales practice.

It has been repeatedly claimed that as the volume of business increases, there will come a point where it becomes no longer sustainable. This statement is being made because GM’s operations are often being compared to a Ponzi scheme. However, as asserted, this is not the case. GM has demonstrated how varying terms of contract generate income for the company, accept offers to sell back gold, and share the profits (hibah). Based on the defaultless record of GM to date, it is a given that GM is able to achieve financial sustainability because their operations is able to deliver the physical gold to customers and service their customers in a manner that covers their expenses and generates profit.

Hedging activities from retained profits like what Airlines do in fuel hedging.

Economies of Scale. As sales increase, the ratio of sell-backs diminish, similar to all businesses, e.g.

Unit trust sales > redemption,

banking deposits > withdrawals,

insurance premium > claims / policy cancellations

GM takes into account long-term profitability over any short-term gains. In order to maintain this financially sustainable operations GM has targeted long term goals that outline where they want their business to stand financially in the future. In determining this GM has taken into consideration the projected profits, the likely level of debt (although they have no debts at all currently) and their cash flow requirements. Their plans to arrive at this position within a specific timeframe were under consideration and would have been concluded within months. Regrettably, the actions by BNM have interrupted that process.

One of the key indicators in determining their sustainability is their balance sheet. The fact that they have been assessed and declared profitable by the tax authorities establishes the profitability of the company. If they are not financially sustainable they would not have been able to survive in the market for so long. This is why their sustainability has been successful until now and is likely to continue in the future. Their performance to date is the irrefutable empirical evidence that their operations are sustainable.

POLITICAL CONSIDERATIONS

It must be realized that nearly 60,000 customers have a vested interest in the outcome of this case. If you take an average of three or four immediate family members, relatives and friends who can be influenced by these customers and perhaps the 6,000 odd consultants, you are talking about 300,000 to 400, 000 eligible voters. Considering that viral interest in the case has reached a glaring 1,300,000 reach in Facebook, it would be naïve to think that this case has no political implications.

Can you imagine the tremendous goodwill that the government can garner if they cleared GM solely on merits and not because it is a vote-buying tactic?

The opposition is conspicuously silent as they are possibly awaiting the outcome of the case to decide which side of the fence to jump. If positive they are likely to jump on to baseless noises made by certain uninformed ministers. If negative they are likely to jump on the side of customers empathizing with their pains.

Weighing all these considerations it needs no rocket scientist to see the options reasonably available to the government to ensure justice is done and peoples’ welfare and interest is protected bearing in mind that no one has complained of any loss against GM.